Dr Brash’s preliminary comments on his new productivity task force suggest it risks heading in the wrong direction. Its focus is GDP and economic growth. The path to the future is different

Two roads diverged in a wood and I —
I took the one less travelled by,
And that has made all the difference — Robert Frost “The Road Not Taken” (1916)

Some people invoke Bhutan’s Ministry of Happiness but, for my whimsy, I like Robert Frost.

Since 1972, "gross national happiness" has been the measure of progress in Bhutan. Bhutan is neither very democratic, nor very developed, and the philosophy is Buddhist in origin, which in this secular country is more likely to be the end of the conversation than a beginning. This is not a post about Bhutan. The point is that they give equal weight to four dimensions of wealth or wellness—economic, environmental, political, and cultural—while we focus on GDP. Right now, that doesn’t make us very happy; we’re fretting about it.

Measured by GDP, Australian incomes are one-third higher than New Zealanders’, and New Zealand has slid in OECD rankings to the bottom third of developed countries. Labour’s aspiration to relocate us in the top half of the OECD was not realised. The National-ACT confidence and supply agreement promised “a high quality advisory group to investigate the reasons for the decline in New Zealand’s productivity performance and living standards relative to Australia’s, and make recommendations to address them”.

The group, dubbed the “2025 task force” and chaired by Dr Brash, will first report in November.

Brash set out his preliminary thoughts in a speech to the Auckland University of Technology on 30 July. It seems pretty clear from the speech that his measures for parity with Australia are GDP and economic growth. Others’ thinking is different.

First, a disclaimer. I’m not discounting the value of material wealth in supporting the living standards we want and expect: the subsidised education, free health care, welfare, pensions, good roads and rail, and so on. The extent of the coincidence between life satisfaction and per capita income has been disputed; some think that there is a ceiling, beyond which growth in income does not advance happiness. And yet, there’s a strong correlation.

In other words, this isn’t an “either or” argument about abandoning growth in pursuit of happiness—more of a “yes, but”.

GDP is our key economic indicator, the headline number that we take as a measure of progress; witness the relief with which reports of 0.1% growth in the June quarter emerged last week. Simon Kuznets, originator of the GDP concept, is said to have warned in 1962 that it was not supposed to be used as a proxy for national economic welfare, and yet that is how the media, politicians, and by extension all of the rest of us, extrapolate from it. But it paints a false picture.

GDP “counts for nothing” behaviour that has economic value. If community volunteer work declines, community well being also declines. The value to welfare of caregiving and housekeeping services such as cooking, cleaning and child rearing is only measured when they are paid for. If you live somewhere that supports a degree of self-sufficiency (trout fishing, foraging for firewood, saving seed to grow vegetables, drying clothes in the sun), GDP has nothing to say about it, but those activities allow income to be spent on something else, and your living standards are probably higher as a result.

It makes no distinction between items that are costs and items that are benefits. Using a clothes dryer instead of the sun takes resources, increases your carbon footprint, and raises GDP. Crime, prison-building, war and disaster relief may all contribute to GDP, assuming they don’t divert economic activity from its ordinary course. GDP counts things as benefits that are a net destruction of wealth in the form of natural capital stocks, such as over-fishing, unsustainable farming, or mining in environmentally precious places.

“Counting for nothing” was Marilyn Waring’s credo in Counting for Nothing: What Men Value and What Women are Worth (1977). These days, Waring is a colleague of Brash’s at AUT, and an advisor to the Canadian Institute of Well Being, which administers the Index of Well Being. Canada is also the home of the Genuine Progress Index developed by GPI Atlantic think tank founder Ron Coleman.

The limitations of GDP are widely and credibly acknowledged, economic orthodoxy it seems, not some green fringe wackiness. But even so, economic growth statistics continue to dominate and shape policy discussions.

To get on the right road to 2025, we need to follow the right road map. We need a different measure and, probably, a different way of thinking, before the drive to achieve growth ends by any available means takes us over the cliff.

The examples of GDP alternatives already mentioned barely scratch the surface of the fertile literature field reviewed in the Report of the Commission on the Measurement of Economic Performance and Social Progress (September 2009). The Commission was the brainchild of President Sarkozy, chaired by Nobel Prize winner, former World Bank chief economist, and Intergovernmental Panel on Climate Change contributor Professor Joseph Stiglitz.

The Commission reiterates GDP’s problems. Its goal was to consider how to better measure economic performance and social progress and, rather than attempting to supply a fully-formed solution, open a discussion with other bodies nationally and internationally.

It observes that its recommended reforms would in any event have been desirable. Facing the worst economic crisis in post-war history, and looking down the barrel of the worst environmental outlook known to mankind, they are essential. Not everybody agreed with everything in the report but, “the whole Commission is convinced that the crisis is teaching us a very important lesson: those attempting to guide the economy and our societies are like pilots trying to steer a course without a reliable compass”.

The report recommends measuring two things, in addition to economic production by way of GDP: first, people’s current well being or quality of life, and secondly, sustainability (that is, whether we will leave future generations enough resources of all kinds to provide them with the same opportunities as ourselves). The two Canadian indexes above are examples of quality of life measures; WWF’s ecological footprint concept exemplifies a sustainability measure.

We do, of course, measure a lot of the relevant variables ad hoc; others we ignore. The Commission’s point is that it ought to be done systematically, and accorded the same priority as GDP. The various measurement tools have huge difficulties and limitations but this, said the Commission, doesn’t excuse inaction; there is a vast body of work on which to draw, and enough coincidence of thinking to indicate the way forward.

Simon Upton endorsed it, commenting on the frustrations of his own experience: “Environmentalists have long (and rightly) despaired of the way politicians have regarded GDP as the pre-eminent measure of policy success … time and again, I found political argument reduced to a banal exchange over who could generate a higher quarterly GDP number.”

This is good timing for New Zealand. We have the direction-setting body, in the guise of the 2025 task force. Before taking GDP as its measure, and assuming rapid strong growth is the answer, it’s not too late for the task force to at least consider the other road.

They probably think they’ve got the baseline but, in the light of this, I would argue that they don’t; I’d like to know what the actual discrepancy with Australia is, on a fully robust measure, before we start using it to justify ideological pet projects. Then, in addressing whatever size of problem eventuates—assuming we’re still worse off, which is not a given—the new paradigm can help too, in testing policy options.

Comments (7)

by stuart munro on September 28, 2009
stuart munro

You're quite right about GDP - but consider for a moment why such a transparently flawed measure is the prevailing measure of government economic performance. It is not at all difficult to create a better objective measure, there is the Human Development Index for example. But governments of every stripe do not find close scrutiny or objective measurement of their economic performance remotely desirable. It could ruin their PR campaigns.

The easiest first step would be to sophisticate GDP reporting figures by routinely posting net costs - crime, accidental damage, bankruptcies along with GDP figures. This information would be useful as an economic indicator as well as going some way towards a more comprehensive standard, which ultimately might involve rating a range of economic activities in terms of standard economic merit and contribution to social capital.

 

by Claire Browning on September 28, 2009
Claire Browning

Hat tip: frogblog. A New Zealand Genuine Progress Indicator has been developed by the New Zealand Centre for Ecological Economics (which looks like a joint Massey University / Landcare Research venture), and will soon be publicly launched: http://www.nzcee.org.nz/research_projects/progressindicators.html

by stuart munro on September 29, 2009
stuart munro

Yes, quite good, there are many similar projects around the world - but the problem with them is that their definitions are too localised and too ambitious - if one's aim is to generate objective reporting of GDP.

GDP is popular because it is a massive oversimplification which sometimes produces useful information. To be broadly adopted, a modification would need to incorporate the minimum of strong influences on GDP and their relative real economy merit. It should not be an insuperable task as a first step, for example, to dissect GDP figures as they are released, for the sectors to which growth is attributed, and discuss the reality or otherwise of growth predicated on GDP growth each quarter.

The difficulty with introducing other measures such as volunteer work, or the plexity of social networks, is that the people you might wish to persuade with such figures typically resist their use. Those of us who follow social as well as economic indicators have a fairly different working picture of a political economy, our political opponents find it advantageous to deny those correlations for the same kinds of reasons major polluting industries deny the environmental damage they cause.

In fact, much of the data required to rebut presumptions such as the perfect market hypothesis or supply side meddling is readily gleaned even from the limited data sets that comprise GDP.

by regan on October 06, 2009
regan

Professor Richard Wilkinson and Kate Pickett, are authors of a recent book entitled "The Spirit Level: Why Equal Societies Almost Always So Better". they both feature on a recent edition of thinking allowed. One of the interesting points they make is that there appears to be thresholds at which the benefits of material gain become offset by costs in other areas (a suitable economic metaphor).

by Claire Browning on October 07, 2009
Claire Browning

Thanks Regan.  I think there's been some other discussion about The Spirit Level and related issues on Pundit recently, here.

by Karl Rohde on November 01, 2009
Karl Rohde

We can have a "happy happy" focus, however, that does not detract from the underlying fundemental that NZ has a low productivity level, yet high standard of living.

More focus on education and building an economy based on innovation is the only real option available to a country physically isolated.

Regardless of opinions as to the relevancy of GDP, the fact that NZ is one of the lowest percentages of R & D in the OECD is a strong indicator of why we are falling behind.

At 0.51% of GDP, we simply can not compete in new economic initiatives, with a poor and largly unfocused education system, we can't educate enough people to improve the innovation in NZ.

Bugger the 3Rs National has focused on, while sneaking in larger classroom sizes.

Make 3 languages, being English, Maori and one other mandatory from 6 years old. Make Science, Art, and Philosophy mandatory until 16. Make education and innovation a priority.

New Zealand requires a residual income based on innovation not manufacturing and dairy; then we can worry about the more important things in life.

But the reality is, we can't do that until we have an educated populous who are driven to learn and explore ideas.

Just my 2 cents.

KR

by Karl Rohde on November 01, 2009
Karl Rohde

We can have a "happy happy" focus, however, that does not detract from the underlying fundemental that NZ has a low productivity level, yet high standard of living.

More focus on education and building an economy based on innovation is the only real option available to a country physically isolated.

Regardless of opinions as to the relevancy of GDP, the fact that NZ is one of the lowest percentages of R & D in the OECD is a strong indicator of why we are falling behind.

At 0.51% of GDP, we simply can not compete in new economic initiatives, with a poor and largly unfocused education system, we can't educate enough people to improve the innovation in NZ.

Bugger the 3Rs National has focused on, while sneaking in larger classroom sizes.

Make 3 languages, being English, Maori and one other mandatory from 6 years old. Make Science, Art, and Philosophy mandatory until 16. Make education and innovation a priority.

New Zealand requires a residual income based on innovation not manufacturing and dairy; then we can worry about the more important things in life.

But the reality is, we can't do that until we have an educated populous who are driven to learn and explore ideas.

Just my 2 cents.

KR

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